Presentation

International compensation refers to all forms of financial returns and tangible benefits that
employees of an international organization receive from their employer in exchange for providing
their labor and commitment.

Designing and developing a better compensation package for HR professionals for the international
assignments requires knowledge of taxation, employment laws, and foreign currency fluctuation by
the HR professionals. Moreover, the socio-economic conditions of the country have to be taken into
consideration while developing a compensation package. It is easy to develop the compensation
package for the parent country national but difficult to manage the host and third country nationals.
When a firm develops international compensation policies, it tries to fulfills some broad objectives:

The compensation policy should be in line with the structure, business needs and overall strategy of
the organization.

1. Allure suitable staff.

2. Keep qualified personnel: The policy should aim at attracting and retaining the best talent.

3. Develop reward structures that are equitable with logical and fair pay relationships between
differently valued jobs.
4. Manage pay structures to mirror inflationary effects.
5. Assure that rewards and salary costs handle changes in market rates or organizational
change.: To retain and motivate employees, employee compensation must be fair. Fairness
requires wage and salary administration to be directed to achieving equity. Compensation
management strives for internal and external equity.
 Internal equity requires that pay be related to the relative worth of a job so that
similar jobs get similar pay.
 External equity means paying workers what comparable workers are paid by other
firms in the labor market.
6. Appraise performance, duty, and loyalty, and provide for progression.: Good performance,
experience, loyalty, new responsibilities, and other behaviors can be rewarded through an
effective compensation plan.
7. Abide with legal requirements. A sound wage and salary system considers the legal
challenges imposed by the government and ensures employers comply.
8. Maintain compensation levels and differentials under review and control salary or wage
costs.

 The policy should aim at attracting and retaining the best talent.
 It should enhance employee satisfaction.
 It should be clear in terms of understanding of the employees and also convenient to
administer.
COMPONENTS

1. Salary:

Base salary is common in any compensation strategy—domestic or foreign. In fact, base salary is so
critical that it is the base on which other components are built. The base salary is the foundation
block for international compensation, whether the employee is a PCN or TCN.

2. Benefits:

 Alternatively known as indirect compensation, hidden salary, fringes or service programmes

benefits constitute a substantial portion of international compensation.
 firms need to address a number of issues when considering what benefits to give and how to
give them. However, the crucial issue that remains to be dealt with is whether the
expatriates should be covered under the home country benefit programmes or the ones of
the host country.

3. Incentives:

• In recent years some MNC have been designing special incentives programmes for
keeping expatriate motivated. In the process a growing number of firms have dropped
the ongoing premium for overseas assignment and replaced it with on time lump-sum
premium.
• Referral and retention bonuses are other incentives that are highly popular. Referral is
when an employee of org brings new talent by introducing their friends, relatives and all
become eligible for hiring bonus but will vary org to org.

4. Allowance:

 One of the most common kinds of allowance internationally is the Cost of Living Allowance
(COLA). It typically involves a payment to compensate for the differences in the cost of living
between the two countries resulting in an eventual difference in the expenditure made. A
typical example is to compensate for the inflation differential. COLA also includes payments
for housing and other utilities, and also personal income tax.
 Spouse assistance (compensates for the loss of income due to spouse losing their job)
 Multinationals normally pay these allowances to encourage employees to take up
international assignments to make sure that they are comfortable in the host country in
comparison to the parent country.

5. Tax: the next component of the expatriate’s compensation relates to taxes. MNCs generally select
one of the following approaches to handle international taxation.

 Tax equalization: – Firm withhold an amount equal to the home country tax obligation of the
expatriate and pay all taxes in the host country.
  Tax Protection :- The employee pays up to the amount of taxes he or she would pay on
remuneration in the home country. In such a situation, The employee is entitled to any
windfall received if total taxes are less in the foreign country then in the home country.

6. Long term benefits:

The most common long term benefits offered to employees of MNCs are Employee Stock Option
Schemes (ESOS). Traditionally ESOS were used as means to reward top management or key people
of the MNCs. Some of the commonly used stock option schemes are:

Employee Stock Option Plan (ESOP)- a certain nos. of shares are reserved for purchase and issuance
to key employees. Such shares serve as incentive for employees to build long term value for the
company.

Restricted Stock Unit (RSU) — This is a plan established by a company, wherein units of stocks are
provided with restrictions on when they can be exercised. It is usually issued as partial compensation
for employees. The restrictions generally lifts in 3-5 years when the stock vests.

Employee Stock Purchase Plan (ESPP) — This is a plan wherein the company sells shares to its
employees usually, at a discount. Importantly, the company deducts the purchase price of these
shares every month from the employee’s salary.

Hence, the primary objective for providing stock options is to reward and improve employee’s
performance and /or attract / retain critical talent in the Organization.

COMPENSATION PACKAGE:
Working within the components described above, MNCs seek to design compensation packages to
fit the specific situations. For example, senior-level managers in Japan are paid four times more than
their junior staff members. This is in sharp contrast to the US, where the gap is much higher. Many
senior level managers in Europe are paid much less than their US counterparts.

Some of the approaches to compensation packages are as below: the popular among MNCs are
going rate approach and balance sheet approach.

GOING RATE APPROACH

In this, expatriates are paid according to the host country salary structures. Where salary structures
in host countries are lower, additional salary payments are made to the expatriates.

Going rate approach is credited with certain advantages. It is easy to understand and simple to
administer. One problem in implementing the going rate approach is to collect information about
local salary structures. This difficulty can be overcome by conducting salary surveys.

If the company has a local subsidiary, the host country HR is usually responsible for determining the
salary based on the local pay structures they use.
However, there are problems associated with the going rate approach. First, there are variations
between expatriates of the same nationality in different locations. For example, Indians expatriated
to the US may be compensated better than those assigned to a developing country.

Balance sheet approach

The balance sheet approach determines an expatriate’s salary based on the going rate for the same
— or a similar — position in their home country. Organizations will typically allocate additional
allowances or reimbursements as appropriate, which ensures employees can maintain their usual
standard of living once they relocate. Ultimately, this method preserves the employee’s current
purchasing power, no matter where they end up working.

Step 1: The organization determines the employee’s net salary based on their home country’s going
rates.

Step 2: The employee’s salary is broken into four categories:

• Taxes
• Housing – including rent, bills, utilities, etc.
• Goods and services – including expenses such as food, clothing, recreation, medical care,
and transport
• Reserve – including savings, benefits, pension contributions, education, etc.

The employee is expected to contribute a portion of their salary to each of these four categories,
equivalent to what they would typically pay for each one at home. If, for example, rent in the host
country is more expensive than an employee’s home country, the organization will pay the
difference. This serves to protect employees from cost differences between the home and host
countries.

In some cases, when an expatriate is relocating to a country where living costs are considerably
cheaper, their employer will decrease the compensation accordingly.

International
There are other approaches to international compensation too, but they are not in popular usage.
One such approach is the international citizen’s approach. In this approach to expatriate
compensation, an international basket of goods is used for all expatriates, regardless of country of
origin. The basket of goods includes food, clothing, housing and so forth. However, expatriates are
not provided salary adjustments that would allow them to purchase exactly the same items in the
host country as in the home country. Rather, they receive adjustments that would allow them to
purchase a comparable local product of the same nature;
For example, rather than a Mercedes (which they had in the home country), they would buy a local
luxury car.

Global salary systems seek to provide worldwide equity in rewards and allow managers to move
between countries with minimal effects on lifestyle.

the lumpsum method

of expatriate compensation. This involves giving the expatriate a predetermined salary and letting
the individual decide about how to spend it. Finally, there is the regional system, under which the
MNC sets a compensation system for all expatriates who are assigned to a particular region. Thus,
everyone going to Europe falls under one particular system and those going to South Africa come
under a different system.

The base salary program

• comprises two elements: the job evaluation plan and the establishment of salary ranges.
• A single job evaluation plan should be used in grading the jobs of executives worldwide.
The job evaluation serves to grade the relative importance of executive positions
worldwide regardless of location. It is fundamental to realize that many of the elements
of the pay package like incentives, allowances and so on depend on the salary grade.
• Salary ranges are determined by the market conditions in each country where the
company has overseas operations. Therefore, separate salary ranges should be set on a
country-by-country basis because using the same salary ranges worldwide would create
distortions and inequity in the job evaluation process.

The incentive compensation program

• For overseas personnel presents additional challenges.
• Local laws and customs, along with distance from headquarters, make the design
and administration of an incentive program ever more complex. Once the base
salary has been determined, the company must define which incentives aptly
convince the prospective executive to take the foreign assignment. One of the most
used incentives has been a large overseas premium.
• Salary premiums compensate the expatriate for the initial difficulties associated with
adjusting to the overseas assignment. For this reason, they are often reduced and
eventually eliminated when the individual remains in the overseas location.
• Hardship allowances

performance pay stand out among the most difficult are as of international compensation.
Whereas performance pay is generally accepted as a guiding principle in corporations
headquartered in the United States, that practice does not hold in less individualistic cultures. The
basic premise of performance pay is that it meet the needs of individual equity. This concept,
however, may not be meaningful in other cultures.

International pay systems have to pay considerable attention to cultural values when deciding
whether or not to adopt this kind of compensation.
SOME OF THE INTERNATIONAL COMPENSATION PROBLEMS

1. Difficulties in Base Salary: One of the complications in the balance sheet approach lies in
exactly defining the base salary upon which to add allowances and other benefits. Some
companies use the parent-country salaries as a starting point.
 Others use an intemational standard approach, while some like the intemational
standard idea but prefer to have regional standards such as the European
Community and Latin American Standards. Finally, some companies prefer to use
host-country salaries as the base salary. Today, most companies compensate their
expatriates based on either a home or a host country philosophy."
2. Local competitiveness: The base salary must be competitive in local terms. If the base salary
is wrong, everything else is wrong, because bonuses and benefit plans usualIy are related to
base salary.
 This means that there must be a process to measure the competitiveness or
benchmark positions in the local market.
3. Problems affecting the benefits component: Companies in all countries provide a
combination of cash and benefits. In developing countries, benefits tend to be simple,
lirnited to legalIy required terrnination indemnity payments and medical payment
supplements. In developed countries, benefits may be more elaborate, providing security
and income replacement on death, illness, termination of employment and retirement.
With regards to this matter, the company should make sure that ali its foreign subsidiaries
have a broad and balanced benefit package for its executives.

Family problems

Lack of respect for acquired international experience

OVERCOMING THE DIFFICULTIES:

Advance career planning helps expatriates know what to expect when they return;

Mentorship - when used by the company - can make the expatriates feel that they are vital members
of the organization;

Opening global communication channels (e.g.: e-mail, faxes) keeps expatriates up-to-date on
organizational matters;

Recognizing the contributions of repatriated employees eases their reentry.